V. Valuation

The first step in the process of acquiring a particular property is valuing the proposed acquisition.

Just Compensation

The U.S. Constitution and most State constitutions require that a property owner be paid just compensation when the government acquires private property. The Uniform Act requires that an "approved appraisal" be used to develop an amount the agency believes to be just compensation. The amount offered to the property owner must be at least the amount of the approved appraisal.

The Appraisal Requirement

The appraisal, and its review and approval by the acquiring agency, are the cornerstones on which the entire effort to provide property owners just compensation is built. The Uniform Act requires that the property be appraised before an acquiring agency begins negotiations to acquire it and that the amount of the approved appraisal be the basis of the offer of just compensation. In addition, the Uniform Act regulations (49 CFR, Part 24, Subpart B, see appendix for copy) require that appraisals be reviewed and approved. However, the Uniform Act also gives the lead agency (which is FHWA) the authority to develop procedures for waiving the appraisal requirement in cases of low-value, non-complex acquisitions.

Appraisal Waiver

The FHWA has developed appraisal waiver procedures; we want to discuss appraisal waiver first because we believe it will be applicable to many local agency acquisitions.

Appraisal waiver provisions are found in 49 CFR 24.102(c). These procedures are available for use by all acquiring agencies; however, not all use them. And, although the regulation specifies a $2,500 limit, FHWA has waived limits up to a maximum of $10,000 for some STDs at their request.

Note: You will need to check with your STD to find out, first, if they are using appraisal waiver procedures (and if they are available to you), and second, what the applicable waiver limit is.

If appraisal waiver is available, you (the acquiring agency) will have to make individual parcel decisions as to whether waiver procedures are appropriate. The Federal requirement is that a waiver be used only if the acquisition is low-value (under the approved waiver threshold limit) and uncomplicated. There may be other considerations as well that may enter into your decision.

The STD will give you detailed procedures for using an appraisal waiver. Keep in mind that appraisal waiver is not a type of appraisal process, so appraisal-related requirements, such as owner accompaniment and appraisal review, are not Federal requirements when waiver procedures are used.

Appraisal

What is an appraisal? The 1987 amendments to the Uniform Act provided, for the first time in Federal law, a definition of an appraisal:

"A written statement independently and impartially prepared by a qualified appraiser setting forth an opinion of defined value of an adequately described property as of a specific date, supported by the presentation and analysis of relevant market information."

The definition contains all of the elements an appraisal must include to support use of Federal funds. Any real property valuation documentation that does not address these elements is not considered an appraisal. Once an appraisal of fair market value is reviewed and approved, it becomes the basis upon which the agency will establish an amount it believes to be just compensation. Having a well-prepared, unbiased and thoroughly documented appraisal report is the most critical step toward the goal of providing the property owner with the required estimate of just compensation.

In addition, each State and (possibly) local agency has developed a unique set of rules, regulations, and policies applicable to its jurisdiction.

Note: We recommend that you contact your STD regarding any technical questions about the appraisal process.

A supplemental FHWA publication, The Appraisal Guide, is also a good source for additional technical appraisal information. This publication can be obtained through your local FHWA Division Office and is available on our website at:

http://www.fhwa.dot.gov/realestate/index.htm

Appraisal Techniques

Appraisals must be in writing and must be retained in your parcel file. The regulations found in 49 CFR Part 24 provide that the format and level of documentation for an appraisal depend on the complexity of the appraisal problem. That documentation must include valuation data and the appraiser's analysis of the data. In some cases, the appraisal problem will allow that "minimum standards" be used; others may require a "detailed" appraisal. However, any appraisal must contain sufficient documentation to support the appraiser's stated opinion of value.

"Minimum Standards" Appraisals

The Federal regulations require that an acquiring agency develop minimum standards for appraisals of low-value or uncomplicated acquisitions that do not require the in-depth analysis and presentation necessary for a detailed appraisal.

Such minimum standards must take into account the type of appraisal needed and appraisal context, consistent with STD appraisal standards. For example, eminent domain appraisals typically require more thorough data research, more in-depth analysis, and more complete documentation and reporting than appraisals prepared for the mortgage lending industry.

Agencies are encouraged to develop and use appraisal formats that meet their needs as long as they remain within Federal and State requirements. The use of customized formats may provide consistency among appraisals and aid both the review appraiser and the negotiator. The following are examples of customized appraisal formats:

Short Form

This form of appraisal may be utilized for whole residential acquisitions, acquisitions of vacant land, or for partial acquisitions involving easily supported damages to the remainder of the property. In all instances, the highest and best use must be the same both before and after the acquisition. The report must include a description of the property and the acquisition, an analysis of the comparable sales used, photographs of the property, and an analysis of the value conclusions.

Value Finding

A value finding format may be developed for uncomplicated acquisitions up to a specific low value, in which only land or land and minor improvements are involved. This format should include comparable sales data, although this data may be included by reference. It should include photographs of the property and a brief analysis of the value conclusion. If an in-depth before and after analysis is indicated, this format may not be appropriate.

Note: Keep in mind all appraisal formats must comply with the Uniform Act definition of an appraisal. You should contact your STD to verify applicability before utilizing a "value finding" format.

Detailed Appraisals

Detailed appraisals, as described in 49 CFR 24.103, should be used for all complex appraisal problems, whether the acquisition is of the whole property or only a part of it. The appraisal report should include an appropriate analysis of such factors as the highest and best use of the property (especially when that use is in transition or a change in the highest and best use will follow the acquisition), severance damages, special benefits, and special purpose properties.

In certain instances, a detailed appraisal may include the findings of a specialty report. A specialty report is a study of unique valuation aspects of the property, such as zoning and permit compliance, machinery or equipment on the property, mineral rights or forestation, or items that generally do not fall within the expertise of a real property appraiser.

A detailed report must contain complete documentation of the data and adequate support of the value conclusion.

A detailed appraisal should reflect STD appraisal requirements and contain the following items:

• The purpose of the appraisal, a definition of the rights or interest being appraised, and a statement of the assumptions and limiting conditions affecting the appraisal.

• An adequate description of the physical and legal characteristics of the property being appraised (and in the case of a partial acquisition, an adequate description of the remaining property), a statement of any known or observed encumbrances, title information, location, zoning, present use, an analysis of highest and best use, and at least a 5-year sales history of the property.

• All relevant and reliable approaches to value (Cost, Income Capitalization and Sales Comparison). When sufficient market sales data is available for the specific appraisal problem, the agency, at its discretion, may require only the market (sales comparison) approach. If more than one approach is used, there must be an analysis and reconciliation of those approaches, including an explanation of the final conclusion of value.

• A description of comparable sales, including a description of relevant physical, legal, and economic factors such as parties to the transaction, source and method of financing, and verification by a party involved in the transaction.

• A statement of the value of the real property to be acquired. For a partial acquisition, a statement of any damages and benefits to the remaining real property also is required.

• The effective date of valuation, date of appraisal, signature, and the certificate of the appraiser.

Owner Accompaniment

The Uniform Act requires that the property owner (or the owner's designated representative) be given the opportunity to accompany the appraiser during inspection of the property. The purpose of this requirement is to ensure that the owner has the opportunity to advise the appraiser of features of the property which might impact the valuation of the property, as well as allow the owner to indicate any features of the property that might not be obvious to the appraiser (such as the location of underground structures, i.e., wells, septic systems, storage tanks, utilities).

Either your agency or the appraiser must invite the property owner to accompany the appraiser during inspection of the property. To assure that this requirement is not overlooked, you should advise your appraiser of this responsibility. Concurrently, you should contact the property owner to supply him or her with the name, address, and phone number of the appraiser. An invitation to accompany the appraiser should be in writing and allow sufficient lead time for the owner to arrange to be present or to request an alternate time. You should document these steps in your parcel file. If the owner declines the invitation, that fact should be documented in the parcel file.

If it later becomes necessary to update the appraisal, the owner does not have to be given an opportunity to accompany the appraiser on the reinspection.

Appraiser Qualifications and State Certification

Under the Uniform Act regulations, each STD must develop criteria for determining the minimum qualifications of appraisers, consistent with the complexity of the appraisal assignment. You should review the qualifications of your appraisers, whether staff members or contractors, and utilize only those qualified for each assignment under STD requirements.

Note: If you use a contract appraiser to do a detailed appraisal, the appraiser must be State-certified in accordance with Title IX of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

Note: We recommend that you consult your STD concerning the appropriate appraiser qualifications and the content and form for the appraiser certification.

Appraisal Review

If you get an appraisal, you must have that appraisal reviewed. The Uniform Act requires that the estimate of just compensation be not less than the agency's approved appraisal. The appraisal becomes "approved" through appraisal review.

Federal requirements for appraisal review are found in 49 CFR 24.104. The regulations require that acquiring agencies have an appraisal review process and that a qualified reviewing appraiser:

• Examine all appraisals to assure they meet applicable appraisal requirements and,

• Prior to acceptance, seek any necessary corrections or revisions to the appraisal.

It is the review appraiser's responsibility to determine if the appraisal report contains accurate data, adequate documentation, and appropriately supported conclusions.

The appraisal review process and your review appraiser also should ensure that there is consistency among the valuations on a project wide basis. For example, two residences, which are similar in most respects and from which your agency is making similar acquisitions, should be appraised and valued similarly.

Deficient Appraisals

If the appraisal is deficient, the review appraiser should return the appraisal report to the appraiser for correction, with the deficiencies noted.

Note: There are instances when the review appraiser discovers minor errors (i.e, insignificant math errors, misspellings, and typographical errors) in an appraisal report. In those cases where minor changes and corrections are warranted, they can be made by the review appraiser without returning the report to the appraiser. All such changes should be initialed and dated by the review appraiser. It is sound policy to transmit a copy of the changes to the appraiser in the event an update is needed at a later date.

If acceptable corrections or revisions to an appraisal report cannot be obtained from the appraiser,

and the reviewing appraiser is unable to approve (or recommend approval of) the appraisal,

and your agency determines it is impractical to obtain an additional appraisal,

then the reviewing appraiser may develop appraisal documentation, either independently or by reference to acceptable relevant information developed by others, to support an approved or recommended value.

Review Considerations

The review appraiser should inspect the appraised property and the comparable sales included in the appraisal report. If a field inspection cannot be made, the review appraiser should document the reason(s) in the review report. The reviewer should examine the appraisal report to determine that it:

• Follows accepted appraisal principles and techniques in the valuation of real property in accordance with State and Federal requirements.

• Has been completed in accordance with the agency's appraisal specifications.

• Contains or makes reference to the information necessary to explain, substantiate, and thereby document the conclusions and estimate of fair market value.

• Contains an identification or listing of the buildings, structures, and improvements on the land as well as the fixtures considered part of the real property.

• Includes consideration of compensable items, damages and benefits, if any, and does not include compensation for items non-compensable under State law.

• Contains an estimate of fair market value for the acquisition and, for partial acquisitions, an allocation of the estimate of fair market value for the real property and for damages, if any, to the remaining property.

Appraisal Review and Just Compensation

There are times when the fair market value of a property does not constitute just compensation. Those situations may include instances in which the property is unique in nature; the appraisal, although properly prepared, does not estimate fair market value with any certainty; or the market value does not adequately measure just compensation.

When these situations occur, the acquiring agency may establish an amount that, in its opinion, represents just compensation not identical to the approved fair market value. Typically, it is the review appraiser who initiates the consideration that just compensation be based on considerations other than the approved appraisal. Depending on who is performing the appraisal review (Certificate of Appraiser) and agency policy, the appraisal review may include an estimate of just compensation; and that estimate may be based on more than the approved appraisal. In any case, agency files must contain documentation and justification for any amount of just compensation that is established.

Note: An acquiring agency may not delegate the function of determining the estimate of just compensation to be offered to the property owner to someone outside the agency including a contract review appraiser. This is a critical point that must not be overlooked.

Appraisal Review Certification and Report

The reviewing appraiser is also required to sign a certification that:

• Sets forth the recommended or approved value of the property,

• Identifies the appraisal report(s) reviewed, and

• States that the reviewer has no interest, present or future, in the property being reviewed.

Upon completion of the appraisal review, the review appraiser should place in the agency's parcel file a signed and dated report setting forth.

• The amount of the approved appraisal of fair market value and the recommendation or estimate of just compensation, including an allocation of compensation for the real property acquired and, if applicable, of damages to remaining real property; identification of buildings, structures, and other improvements on the land; and identification of fixtures considered part of the real property being acquired.

• Whether, as part of the appraisal review, there was a field inspection of the parcel to be acquired and of related comparable sales. If no field inspection was made, the reason(s) should be stated.

• That the review appraiser has no direct or indirect present or contemplated future personal interest in the property or in any monetary benefit from its acquisition.

• That the estimate, or recommended estimate, of just compensation has been reached independently, without collaboration or direction, and is based on appraisals and other factual data.

The degree of detail provided in the review appraiser's written review report should reflect the complexity of the appraisal problem and report under review.

Appraisal Review Contracting

Historically, the STD appraisal review function has been the responsibility of staff reviewers and included the responsibility of estimating just compensation.

More recently, STDs, and especially local agencies, have hired contract review appraisers to perform the appraisal review function. The Uniform Act makes it clear that the agency must establish an amount believed to be just compensation. Therefore, if an appraisal review is done by a contract review appraiser, the acquiring agency must retain the responsibility for establishing an estimate of just compensation.

Sample Certification